Solvency II Quantitative & Strategic Impact: The Tide is Going Out

October 14, 2010
Industry Trends
EMEA

Abstract

REPORT PREVIOUSLY JOINTLY PUBLISHED BY OLIVER WYMAN AND MORGAN STANLEY

Solvency II will have a profound strategic impact on the insurance industry and will cause a reappraisal of traditional business models.

As the Solvency II deadline moves closer, and the framework itself becomes clearer, strategic implications for the industry come to the forefront. Solvency II will act as a catalyst for significant change with profound strategic impacts, as laid out in Oliver Wyman and Morgan Stanley’s latest research report, Solvency II Quantitative & Strategic Impact: The Tide is Going Out. The report applies the Solvency II framework to the industry overall and on individual business models.

As Solvency II exposes the industry’s economic risks, M&A opportunities will arise from the transparency of insurers’ balance sheets and the resulting identification of risky businesses from those with sustainable profit streams. Therefore, insurers’ need to shift their product mix and achieve business diversification, and balance sheet scale will drive M&A deals.

Based on the research, insurers’ management teams are likely to focus on restructuring the life insurance portfolio from a traditional model towards unit-linked and variable annuity-type products. Additionally, there will be a stronger focus on asset liability management (e.g., hedging, risk management, and reinsurance).

This report analyzes the profound strategic impact of Solvency II on the insurance industry and examines how insurers can adapt their corporate structures to benefit from Solvency Capital Requirements (SCR).

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Headline Conclusions in Pictures

4

Aggregate Impact of Solvency 2 – Key Strategic Conclusions

6

The Quantitative Impact of Solvency 2 (QISS) – Our Model Outputs

16

 

Our Quantitative Model – How It Works

20

 

Mosaic Composite Company

24

 

Mystic Global Life

28

 

Fantasy Re

32

 

Accidental P&C

36

Key Outstanding Debates

40

Implications for Life Insurance Products

49

Implications for Non-life and Reinsurance

57

Implications for Asset-Liability Management

63

Internal Models – Adoption Likely by all the Major Players

67

How Insurers Might Adapt Corporate Structures

70

Appendix: A Guide to Solvency 2

75

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